Final answer:
The U.S. government's deregulation policies allowed S&L banks to get into trouble by permitting riskier loans without enough collateral. The resulting bad loans and decline in the real estate market led to bankruptcy and federal bailouts. This crisis affected other banks and businesses as well.
Step-by-step explanation:
The U.S. government's policies to deregulate the banking industry allowed savings and loan (S&L) banks to get into trouble because they were permitted to make riskier loans without sufficient collateral. During the early 1980s, interest rates were high, and to stimulate the economy, the Reagan administration eased restrictions on S&Ls, allowing them to invest in riskier ventures. As a result, many S&Ls made bad loans, leading to bankruptcy and a decline in the real estate market.
Because S&Ls were part of the banking system, each depositor's savings accounts were insured by the federal government. When many of these institutions faced financial trouble, the government had to pay out more than $150 billion in federal bailouts to protect depositors' funds. This failure was mostly blamed on the Republican Party due to their support for deregulation, although some Democrats were also involved in approving the deregulation and accepting illegal donations from the banking industry.
The fallout from the S&L crisis also affected other banks, as depositors lost confidence, leading to a lack of funds available for lending. This, coupled with banks calling in loans early, resulted in businesses suffering and even declaring bankruptcy. The government eventually passed laws to strengthen bank supervision and prevent similar crises from occurring.